Answer to Question #50196 in Macroeconomics for Neha

Question

Why are international inventory are specially concerned about the real interest rate as opposed to nominal rate.

Answer 1

The real interest rate equals the nominal interest rate minus the inflation rate. The nominal interest rate is the growth rate of investor’s money, while the real interest rate is the growth of investor’s purchasing power. Inflation makes a negative impact on earnings because of purchasing power falling. That’s why it is important for international inventory to use a real interest rate in inventory evaluating techniques.